SoftBank-backed small business lending startup Kabbage is moving into payments - its execs explain why combining the two services makes sense
- Small business lender Kabbage announced the launch of Kabbage Payments on Thursday, marking its first step outside of the lending space.
- Kabbage Payments provides customers with digital invoice tracking, a dashboard to manage cash flows and loans, and the ability to send customers links to get paid electronically
- Cofounders Rob Frohwein and Kathryn Petralia both said that an IPO isn't in near-term plans for 10-year-old Kabbage, and that public market appetite for "mono-line" fintechs seems weak.
- Frohwein sees Kabbage as well positioned to offer customers a payments platform which, in turn, will help them make quicker borrowing decisions.
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Small business lender Kabbage is launching a payments service, marking its first step outside of the lending space.
The move is indicative of a larger trend of single-product fintechs exploring new offerings. It also makes good on ambitions to expand into payments that SoftBank-backed Kabbage had shared with media outlets last year.
Kabbage Payments provides customers with digital invoice tracking, a dashboard to manage cash flows and loans, and the ability to send links to get paid electronically. Those tools are targeting a payment lag that Kabbage and other startups are hoping to muscle in on.
"The reason that's so powerful is that the traditional methods for invoicing customers and seeking payment of invoices is really archaic. It actually ends up leading to customers letting those invoices pile up for 30, 60, even 90 days," Rob Frohwein, CEO and co-founder of Kabbage, told Business Insider.
Fundbox, another small business lender, is also trying to solve for the lag that can result from delayed payment and net terms. Where Kabbage is offering a platform for payment processing, Fundbox stuck with the lender approach, offering its clients advances on receivables to give them cash prior to net terms settlement. Fundbox in turn settles on net terms with the purchaser.
Payments-first companies like Stripe and Square, which have become small business lenders themselves, have a few advantages. They already have data related to revenue coming in via their payment platforms, and they have large customer bases to lend to, Frohwein said.
But an established lender could have visibility into more of a company's overall finances, Frohwein said.
"The challenge they have is that they don't learn how to lend in the wild. They only get to see the data coming in over their system," he said about payments-first companies. "Many small businesses use multiple systems to get paid, so you don't necessarily get a full picture."
Frohwein sees Kabbage offering customers a payments platform that will also influence how they borrow.
"A core competitive advantage we have moving into payments is we really understand the cash flow of our customers," Frohwein said.
Using the new dashboard feature, Kabbage customers will be able to see both their cash flow data and loan data in one place, helping them make quicker decisions around borrowing.
"What we've learned over time is often our customers borrow too much too soon, and they hold onto it for too long," said Frohwein.
Kabbage said on Tuesday that so far this year, it has added 42,000 new customers - already beating its total from 2018. As its customer base grows, Kabbage says 75% of its loans are going to repeat customers.
Both Frohwein and Kathryn Petralia, COO and co-founder of Kabbage, said that an initial public offering for 10-year-old Kabbage isn't in the near-term plans.
"It's important for us to make sure that our vision is seen through and the market really understands the opportunity that Kabbage has with its small business customers and the vision we have before we make a decision like that," Frohwein said.
When Kabbage announced $250 million in SoftBank funding in August 2017, the startup said it would use the investment to expand non-lending products. And its execs now say that having a suite of services would be needed to win over public markets.
"I think what we're seeing in our industry is a bunch of public companies that are comprised of mono-line products," Petralia told Business Insider. "It seems pretty evident that the market is not super enthusiastic about those types of businesses."
Both OnDeck and Lending Club, two alternative lending companies, went public in 2014, and shares in both have fallen significantly since their IPOs. OnDeck has in the past received criticism for its interest rates. Lending Club faced its own challenges, with its CEO stepping down in 2016 after controversies around falsified loan records and failure to disclose personal interests in business dealings.